US President Barack Obama greets Democratic Governor Deval Patrick of Massachusetts (L) after speaking at a rally for Patrick at the Hynes Convention Center in Boston, Massachusetts, October 16, 2010. (Image credit: AFP/Getty Images via @daylife)

Under Governor Deval Patrick, Massachusetts has tried a couple of methods for limiting the government’s exposure to rising health-care costs. First, Patrick forced insurers to stop raising premiums, which led to a predictable train wreck, as insurers started hemorrhaging cash. When a state appeals board overturned Patrick’s decree, he shifted gears, and began going after the prices charged by hospitals and doctors. On Friday, the Massachusetts House unveiled new legislation toward that end. And progressive health-care observers around the country are taking notes.

The 178-page bill, entitled the “Health Care Quality Improvement and Cost Reduction Act of 2012,” will be followed by similar legislation from the Massachusetts Senate this week. As the Pioneer Institute’s Josh Archambault puts it, “the character who should be the hero of this drama, the patient, is nowhere to be found.” Rachel Zimmerman and Carey Goldberg summarize the bill this way:

Oversight: A new, quasi-governmental agency called the Division of Health Care Cost and Quality would oversee the transition to the new payment and delivery system with a board including consumer, government and industry representatives.

Cost-Cutting: To curb the increase in medical spending, the plan establishes a cap for health-care spending linked to the local economy, the Gross State Product, minus one-half a percent.

Leveling The Field: The state could impose a 10 percent “luxury tax” on pricey hospitals that charge more than 20 percent of the state median price for a given service without being able to justify that higher price. (Two earlier reports by Attorney General Martha Coakley found that certain hospitals exploited their market clout and charged higher prices without offering better quality care.) Hospitals would pay this penalty into a “distressed hospital” fund for institutions that serve a high proportion of poor and vulnerable patients.

Accountable Care Organizations would take on greater prominence, though the bill stresses that joining an ACO would be voluntary for patients and providers. The bill defines the size of an ACO as bigger than 15,000 people and no larger than 400,000. Patients would have the right to appeal decisions made by their ACO doctors, and have the right to a second opinion.

Shifting Payments: The state’s medical establishment would continue its shift toward global payments and away from fee-for-service systems. The measure would “transition the industry to adopt alternative payment methodologies such as global payments and bundled payments for acute and chronic conditions.”

Technology: Electronic health records would be required for all providers by 2017.

Greater transparency would be attained through detailed pricing available to consumers on the Web, as well as greater disclosure of out-of-pocket costs to patients up front.

Streamlining Care: The measure stresses greater coordination of care through primary care, and the establishment of “patient-centered medical homes” so that patients could have a single point of coordination for all types of care.

Medical Malpractice: New rules on medical malpractice would create a 180-day cooling off period while both side try to negotiate a settlement. Also, the measure would allow providers to freely offer an apology to a patient.

Tiering: Under a provision called “smart tiering” patients might pay more for more expensive services.

Upping The Rates: The bill would make several changes to Medicaid, including increasing MassHealth rates paid to providers.

Training: Funding for workforce training and development are included in the measure, and a provision would forgive loans to primary care doctors who practice in rural or underserved areas.

Bureaucrats will decide which providers are charging too much

Section 56 of the House bill directs the newly empowered Division of Health Care Cost and Quality to “assess a surcharge” to providers who charge more than 20 percent more than the state median. The surcharge will equal 10 percent of the difference between the provider price and the state median.

The bill provides two exemptions to this “luxury tax.” The first is if “said service has limited or exclusive availability in the commonwealth, as determined by the division.” The second is if “the division determines that the quality of the service is reasonably related to the price.” These vague definitions lend themselves to political hanky-panky, in which politically powerful and well-connected providers exempt themselves from the bill’s luxury tax, or set up its definition of “quality” in self-serving ways.

Providers are “prohibited from passing along the costs of this surcharge to customers,” but this is empty rhetoric. Given the incredible complexity of hospital billing, it will be very easy for high-priced hospitals with significant market power to charge more for other services—say, those in which their prices are under the 120-percent-of-median threshold—to make up for lost revenue in other areas.

Low-cost providers will have an incentive to increase prices

The beauty of government-controlled relative pricing is that it creates an incentive for everyone to raise prices. There are two ways for a high-cost provider (say, Partners HealthCare) to get their prices within the 20-percent band: (1) lower their prices; (2) get everyone else to raise their prices.

Thanks to the transparency provisions of the bill (and transparent prices are, in general, a good thing), low-cost providers will know what their peers are charging. They will therefore have the ability to raise their prices considerably.

For example, let’s say Mass General charges $32,000 for a coronary angioplasty, whereas the state median is $21,000, driven in part by low-cost Tufts, which is charging $16,000. Now that Tufts knows that MGH is charging $32,000, Tufts knows that it can charge, say, $25,000 per procedure, and still gain favorable status from insurers, without incurring the new “luxury tax.”

Once Tufts raises its price to $25,000, the “median” price for angioplasties in the state goes up, allowing MGH to raise its price further, and the cycle repeats itself.

Unserious about medical malpractice reform

If Massachusetts were serious about cost control, the House bill would have Texas-style caps on malpractice damages. In 2010, in Texas, there were 209 paid medical malpractice claims per 10 million residents, compared to 433 for Massachusetts. (The national average was 326.) And the average medical malpractice payment in Texas that year was $170,632, compared to $336,437 nationally and $484,290 in Massachusetts.

Section 107 of the Massachusetts bill caps malpractice claims against a non-profit charity at $100,000, exclusive of interest and costs. Other non-profit organizations, and for-profit ones, still face unlimited liability.

Don’t worry, though: providers will be able to issue an “apology” to the harmed party, which will be “inadmissible as evidence in any judicial or administrative proceeding.” Studies show that such apologies do reduce the frequency of lawsuits, so legalizing apologies isn’t nothing.

But any doctor will tell you that it is the personal fear of liability that drives defensive medicine. Until and unless that liability is numerically capped, doctors will continue to over-prescribe tests and procedures that protect them from lawsuits.

On a humanitarian level, it’s great that the law increases reimbursement fees to physicians for MassHealth, the state’s Medicaid program. But it’s not clear to me, based on an initial reading of the bill, how much that will cost. Especially given that Massachusetts has an especially extensive Medicaid program.

Global budgeting never works

Finally, the bill assigns a “global” budget to the state health-care system, linking state health spending to the Gross State Product less 0.5 percent. While it would be great for health spending to grow at a lower rate than the rest of the economy, it’s ironic that Democrats in Massachusetts find this appropriate, given that, on the national level, when Republicans advocate such a spending trajectory, they’re lambasted as cruel and inhumane.

More importantly, global budgeting doesn’t work. If you’re an individual doctor in Massachusetts, you’re not thinking about a state-mandated “global budget” when you make your prescribing decisions. You’re thinking about the best interests of the patient you have, and about protecting yourself from lawsuits.

In the Medicare program, we’ve been trying to impose various price-control systems since the 1970s. None of them worked. As I wrote in my National Affairs article, “Saving Medicare from Itself,” the fundamental problem with top-down price controls is that individual doctors are always capable of outsmarting the bureaucrats, who don’t figure out that they’ve been had until it’s too late.

Democrats in Massachusetts are labeling their efforts as “Health Reform 2.0.” They think they will save $160 billion over the next 15 years. And we can be sure that Democrats in Washington will aim to impose similar provisions on the U.S. health-care system when they have the chance.

As Harvard Medical School Dean Jeffrey Flier put it in 2009, “The majority of our representatives…quietly [understand] that [the Affordable Care Act] can only be the first step of a multiyear process to more drastically change the organization and funding of health care in America. I have met many people for whom this strategy is conscious and explicit. We should not be making public policy in such a crucial area by keeping the electorate ignorant of the actual road ahead.”

Thanks to our neighbors in Massachusetts, the electorate can now know what to expect.

But there are some differences of opinion among Massachusetts legislators that could become roadblocks, namely determining how aggressive the state ought to be in slowing health-care cost growth.

The House has proposed capping health-care cost growth slightly lower than the rest of the economy, while the Senate would go allow costs to rise just faster than Gross State Product. Moore, for his part, is open to a more restrictive cap albeit not as tight as the Massachusetts House proposal.

“I’d love to get below inflation,” he says, “But we’re just concerned that might be too drastic. That’s almost like cutting the average rates of the past few years increases in half. We think the House version moves in that direction too quickly.”

There are also questions of enforcement: If Massachusetts does cap its health-care spending, how can it make sure that health-care providers will stay within the budget? Both bills will have a state agency watch over the process, with authority to write a “corrective action plan” if it didn’t see costs moving in the right direction.

I asked Moore whether such an agency would have enough teeth to enforce steep spending cuts. “We didn’t want to hold the hammer all the way out there,” he explains. “I think the folks in health care understand this is their job, so you might not need the hammer. And we will have someone watching, with the authority to require work plans. Maybe they’ll come back to us and eventually ask for more authority.

“We view this as a step in the right direction but not necessarily the end solution.”

Lynn Nicholas, president of the Massachusetts Hospital Association, said her group is looking at both plans.

“Hospitals support both innovative and common sense approaches to reforming the health care payment and delivery systems,” she said. “Our members’ goals include promoting transparency and reducing cost increases while giving the market adequate time to build on the advances it’s already made...”

Lora Pellegrini, president of the Massachusetts Association of Health Plans, said her group will work with both houses, but cautioned that the plan ultimately must include efforts to rebalance market power.

“As the Attorney General’s landmark reports have highlighted, the wide variations in prices are not related to the complexity or quality of care or the severity of illness. Instead, the market clout of certain providers, due to either brand name or geographic location, and the prices they charge, is one of the main drivers of continued premium increases.”

Prices were out of control at the end of third-century Rome, and the Emperor Diocletian was determined to rein them in. In AD 301 he issued his famous Edict on Prices, a complex piece of legislation that banned speculation and established price ceilings for a wide range of goods and services. But the ambitious law failed. Though violators could be punished with death, inflation and speculation persisted. Goods were hoarded, or sold on the black market. The economic crisis worsened. Eventually the law was abandoned. Like countless rulers before and since, Diocletian discovered the hard way that price controls don’t work. They worsen the problem they are intended to solve, leading to shortages, rationing, and even higher prices.

Yet the belief that government can control inflation by fiat never seems to lose its allure.